Why OpenAI Is a Gamble

Why OpenAI Is a Gamble

OpenAI has unveiled its highly anticipated Strawberry artificial intelligence model, designed to tackle more complex problems than its predecessors. However, as the company seeks to raise funds at a staggering $150 billion valuation, investors may wonder how this figure can be justified. Recent discussions with Middle Eastern investors shed light on this valuation challenge.

On the surface, OpenAI's valuation seems reasonable. As the leader in generative AI, the company has rapidly transformed the tech landscape in less than two years, with its business experiencing significant growth. Annualized revenue has reportedly surged by 150% since the end of 2023, reaching around $4 billion, with projections suggesting it could hit $8 billion by 2025.

Using this “annualized” revenue metric—essentially multiplying monthly revenue by 12—suggests the $150 billion valuation equates to approximately 18.8 times the expected revenue for 2027. For a relatively young company in its growth phase, this isn’t outlandish. In comparison, Nvidia, a more established firm, currently trades at nearly 14 times its projected revenue for January 2027, according to S&P Global Market Intelligence.

However, several complications could challenge this assessment. OpenAI is operating at a loss, with estimates indicating it could lose around $5 billion this year due to the high costs associated with training and running large language models. Unlike traditional software, AI chatbots lack the economies of scale that drive profitability; each user query incurs significant operational costs, known as inference costs. The new OpenAI model, called OpenAI o1, is expected to be even more expensive to run due to its advanced reasoning capabilities.

Moreover, as OpenAI's chatbot becomes available on the iPhone, increased usage could drive costs even higher, with no corresponding revenue since the service won't generate income for Apple. This raises concerns that OpenAI’s financial struggles may persist, and there is still uncertainty regarding future profit margins and the amount of additional funding the company might require before reaching profitability.

Another layer of uncertainty is the unpredictable market for AI chatbots, particularly regarding user willingness to pay for these services. Competing companies also pose a threat; Google, while currently trailing behind with its Gemini model, has the financial resources to pursue AI aggressively without needing to raise additional capital.

Investors also face challenges related to OpenAI’s corporate structure, which currently combines nonprofit and for-profit elements. While there are discussions about transitioning to a for-profit model, investors must navigate the uncertainty of the current structure and the potential for an eventual public offering.

For major tech companies like Apple, Microsoft, and Nvidia, investment in OpenAI may serve strategic interests, fostering collaborations that benefit their own businesses rather than purely seeking financial returns. However, for individual investors or others hoping to profit from OpenAI's growth, the outlook is far more uncertain.

In contrast, OpenAI CEO Sam Altman remains optimistic about the company’s future. In an upcoming interview with Oprah Winfrey, he envisions AI as a transformative tool for individuals, although he acknowledges that accessibility may depend on financial means.